Las Vegas Sands made news when they announced that they had basically cut off comps for a large segment of their customers.

In this edition of Simpson on Vegas, Jeff takes a look at that new policy and adds his two cents.

Continue after the break...

I'm not going to say that Las Vegas Sands is crazy to say the company is going to stop giving complimentary rooms, meals and other perks to all but the biggest gamblers at its Venetian and Palazzo casinos, but I will say that, if they follow through, I think it is a short-sighted, stupid move.

This is what Las Vegas Sands Chairman Sheldon Adelson said on the company's recent fourth quarter conference call: "We know that the subject of comps has been played out all across Las Vegas, but we've taken a different position. We've essentially cut out all our accounts except the most highly rated players. No more packaging deals to try to be competitive with others. There's no more comp rooms given out. There is no more RFB. There's no more food and beverage. There's no shopping credits. There's no restaurant credits. There's no showroom credits. We're selling rooms, and we see that it's resulting in a substantial increase in cash income."

And Sands President Michael Leven said on the same call: "We've lowered our comp allotments considerably to get a better customer in, which may cause some short-term occupancy looks that looks down, but to the cash component to us is actually better."
Leaving their biggest gamblers aside, who will presumably still be able to score competitive comps, Sands executives think that they'll be able to fill their rooms with enough people who will spend enough on non-gaming amenities to make up for what the casino would have netted from comped gambling customers or with people who will still gamble without the prospect of earning comps.

I find that hard to believe. First, smart casinos base their comping decisions based on the expected win from rated table play or on points earned from metered (through slot cards) slot play. Most casinos are willing to grant comps based on some fraction of the casino's expected win from recent play (a fraction that is usually based on somewhere between one-sixth and one-third of the expected win for the casino). Future comp offers given to customers who have previously played in the casino are based on past play. A well-run comp program gives customers rewards for their casino play, rewards that should be worth significantly less than than the expected wins from the customers.
When Adelson says "We're selling rooms," he displays a basic ignorance about how a properly functioning high-end casino resort should operate. Sure, he has more than 7,000 rooms to sell (that's more than 2.5 million room-nights per year), so every dollar in average daily rate adds up to more than $2.5 million (gross) per year at 100 percent occupancy. For example, an average rate of $200 over the couse of a year would yield about $511 million in room revenue at 100 percent occupancy, while a $180 rate adds up to only about $460 million. So Adelson clearly wants to maximize room rates and occupancy -- there's nothing wrong with that. All operators should.

But comping is a separate matter. As long as a comping program is being run correctly, it should enhance resort revenue. If the internal "price" of comped rooms is being valued correctly and if the comp program has a sensible reward rate based on rated play or slot points, the casino should be making more than enough revenue on the gaming side to cover the cost of the comps.

A couple of caveats. If the Sands' two Strip hotels are running at full occupancy with cash-paying, non-gambling guests who spend more on non-gaming amenities like food, clubs and entertainment, then the internal value of rooms in the comp-granting process should be adjusted higher to reflect the true cost of replacing a bigger-spending guest.
And second, if gamblers continue to gamble as much or almost as much without comps, then Adelson & Co. are right, and I am an idiot. But I don't believe most gamblers will continue to play at Venetian and Palazzo if they have no prospect of getting anything comped beyond a free drink (I'm presuming players are still getting free drinks at the tables or machines). Why would they? It's not like Adelson's casinos are so hot, so special that gamblers have to play at a no-comps casino. As a matter of fact there are a handful of better casinos on the Strip, two of them right across Sands Avenue.
Now, I should note right here that I'm skeptical about Sands' follow-through on its announced move. Will its hosts really tell a customer who just dropped $5,000 over a weekend, playing 12 hours of blackjack at more than $100 per hand, that they won't pick up the tab for his room or at least a couple of meals? That's where the rubber meets the road on the new policy: When gamblers' expectations (for reasonable comps) aren't met and those folks never return -- and when they spread the word. And will Sands really stop giving players comps for their accumulated slot points? I am dubious.

Steve Wynn said on his own company's conference call that, while he hadn't really paid much attention to the new Sands comp policy, he saw no reason to change the (admittedly conservative in awarding comps) policy at Wynn Las Vegas and Encore. Wynn has long crushed all competitors when it comes to the performance of his gaming floors, and he understands the aspirational nature of the gambling business. Treat the green- and black-chip bettors right -- someday they may be playing with higher-denomination chips.

This isn't the first issue where Sands and Adelson have broken with the Las Vegas pack. I've been talking for a while about the company's indifference to the industry norm of the all-at-once "hard opening" of new resorts, noting that while Sands suffers from a public relations deficit and media criticism, the company gets as many revenue streams flowing as fast as it can and eventually gets the properties operating smoothly. Adelson loves to mention how he understood the value of convention-goers to a modern gaming resort and how he scorned the "conventional" wisdom that those customers were casino poison. (He clearly was right on that matter, proven by the many copycats he spawned.) I think Adelson thinks comping is another issue where he can go his own way, and I think something in his personality compels him to again try to do his own thing.
This time, I'm certain he's wrong.

Comments

I've yet to test it but rumor is that the poker comps are supposed to stay exactly the same. We earn $2 per hour at the poker tables and, while the Venetian poker room is nice, poker players are a finicky sort. No freebies, high rake and players will find another spot that will treat them better.

I agree with the fact that this is a bad idea and very short sighted. I'll be curious to see how it plays out.

Great breakdown on the new policy. I'd add that even if LVS wanted to cut comps, coming out and publicly saying it rather then just reducing the budget for them exponentially makes the error even worse. Almost like kicking sand in someones face.

LVS was definitely one of the most aggressive in chasing gamblers during the recession, for a total of about $300 through I regularly had 3-4 night weekday offers available. Knowing that they would likely revert to their pre-recession days I decided not to take the comp or spend any more play there.

I definitely think this will hurt them in the long run although some boards are starting to mention letters to gamblers offering comps already at lower levels, so maybe it's already affected some of their revenue. It will be interesting to see how this plays out.

February 18, 2011 4:55 PM
Posted by dave202

I'm not so sure he's wrong. He's got some smart people in his organization and if they could have talked him out of this, I think they would have. And even if he didn't take their advice, I don't see the harm in at least trying this. No one has tried this in Vegas in many years. His property is busy on weekdays because of conventions when other properties are empty. So I'm not willing to bet against him. But I think if he's successful, there won't be too many copycats because, other than Mandalay, whose got the convention space he's got?

February 18, 2011 9:41 PM
Posted by in the know

They have not eliminated all comps, just mid-level and below. Your example of dropping $5,000 would qualify you for a comped room there.

February 19, 2011 12:28 PM
Posted by Dan short

Good post Jeff.

He may have already backed off, based upon the general uproar on all of the forums that I visit. Something is coming March 1.

The problem is he went around cancelling comps that had been around for months, including ours, three days before they were to be used.

He has lost our business no matter what he does in the future and a lot of other people that we have heard from.

This was doomed to fail rtight from the start and the method of implementation was almost criminal.

Bye Bye, Palazzo. It was fun while it lasted.

Can't wait for comments on Vegas Gaing.

February 19, 2011 3:40 PM
Posted by Chris

It's definitely seems like a counter-intuitive move at first glance, but new ideas and business models are the only chance that Vegas has to survive at this point. Unfortunately 'business as usual' is simply not a profitable option for the 5-Diamond joints these days.

And the move may not be as crazy as it appears. There are many examples of companies cutting off unprofitable customers to improve their bottom lines, despite the initial backlash such a move inevitably receives.

In the gambling industry, the segment of green/black chip players tends to include most of the "entitlement" customers, who haggle with hosts for more comps than the computer recommends, and whose patterns of play tend towards quitting whenever they are ahead instead of playing for consistent periods of time each session. More and more players fall into this behavior when the economy suffers, and they don't necessarily ever change back.

While these players aren't necessarily getting something for nothing, there is a point where the real profit margins on this customer are actually narrower than they are on a customer who pays retail for everything. If Sands has identified that they are turning away high paying convention/leisure business in order to serve so-called "loyal" casino customers that are actively trying to milk them, then cutting them off may not be a bad idea after all.

I agree, Jeff. I think this may be a costly misjudgment on $LVS's part. I believe $WYNN can get away with being a little tighter on comps than most other Strip properties. They have a product and service culture that creates a value for customers. Even if they are paying, they still feel like they're getting something special. I just don't think that's the case with the MEGACENTER Venelazzo. Maybe a couple of quarters of Singapore growth have made Las Vegas profits a little less consequential for $LVS.

I was going to make a more extensive comment, but something you wrote caught my eye that I want to comment on quickly.

I don't think LVS aspires to offer a high end casino resort. I think they aspire to offer a high end convention hotel that happens to offer a casino. Judging from the crowds I've seen there the last few times I've been in Vegas they're doing pretty well at that.

Their customer base of conventioneers are going to bring a few hundred dollars (or whatever) to gamble with, they fully expect to lose it, and they don't care about comps because they're not going to be back soon if ever.

Adelson has apparently decided that the meeting business has come back strongly enough that he can keep the casino busy with conventioneers and whales. Maybe he's right.

Those of us who had received free room offers from LVS in the past are all expectedly pissed at this move...and rightfully so. I'd read a report suggesting that LVS' new alliance with a hotel management partner had been somewhat successful at increasing room occupancies from paying guests ( as opposed to comped room patrons) and that this was the purported cause for the increased revenue. It just appears to this long - time LVS midstakes player that some semblance of balance regarding traditional comped rooms and their new goal of attracting upper crust clientele should have been weighed. I'd still like to have my crumb of cake ( 30 - 40% of the casino's expected win, for God's sake) and be able to eat it, too. I'm betting ( and honestly hoping in some human nature fashion) that this bites them in the ass.

With respect to Dave202's and Dan Short's comments, eliminating comps going forward is one thing but reneging on comps already awarded is unforgivable, beyond the pale, duplicitous ... and those are the *nicer* adjectives I would use. If $LVS awarded you a room comp, say, then pulled it back, that's the kind of petty move customers will never forget (and find difficult to forgive).

Unfortunately, "kicking sand in someone's face," as Jinx poetically put it, has been Sheldon Adelson's *modus operandi* ever since he came to Vegas. Now that the Strip is a comparatively puny share of $LVS' revenue stream, Sands is evidently going to treat it as a backwater of the Adelson empire, even purging "Las Vegas" from the company name. C'est la vie -- but this is the sort of episode that has made Adelson one of the most heartily disliked casino operators in Vegas' recent history, perhaps even as despised as Ralph Engelstad.

March 1, 2011 10:57 AM
Posted by Dan short

Thanks Dave. Let's see how the latest Macau bribery fiasco changes his attitude to Vegas. When his stock was below $10 people were feeling sorry for him, but as his stock falls today, we can only cheer, and relish in the fact that investors appear to be moving to the Wynn.

He will miss his Vegas clientele and we won't be back.

March 1, 2011 6:32 PM
Posted by Mark

LVS is being investigated by the US Securities and Exchange Commission over its compliance with the Foreign Corrupt Practices Act, which prohibits bribing foreign officials.

Doesn't Wynn already do what? Wynn was never overly generous with comps to low-rollers, at least when we were staying there frequently. But they didn't tell you in effect to get lost (well they did supposedly back some people off in the short time they had some >100% VP).

For a while at least anyone with a "Gold" level membership in LVS' players club could get a comped room just about any time, and they had small payout slot tournaments so often they just kept an area of the casino roped off for them. That's what Sheldon was bragging about cutting off.

I walked through Venetian & Palazzo this past Monday afternoon and the casino was packed, especially Venetian's. Yes, for now at least Sands doesn't need steady customers as long as the conventioneers keep coming.

April 4, 2011 5:50 AM
Posted by Trevor

Clearly the money is not made on the rooms so all future marketing strategies have to be focused on giving comps to the right people and filling the casino floor with large punters.

May 15, 2011 2:43 PM
Posted by paco

Gaming revenue for the first quarter of 2011 hit a low below that of 1st quarter 2004 long before the Palazzo was built. In a bit of a shock it actually went below revenue for their Bethlehem PA facility (where the hotel has not opened yet).
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Because of the lowered value of comps and cost , net income for the quarter dropped a mere $10 million for the quarter compared to last year. Of course the huge Singapore figures more than made up for Vegas.
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So far the new Sands policy can be called a draw. The big beneficiary seems to have been Wynn, whose properties raked in record gaming revenue for the quarter.